Contracts are a relatively straightforward process most of the time. There is a clear offer with reasonable consideration and acceptance between both parties. Smooth sailing. However, every once in a while, a spanner gets thrown in the works.
Void and voidable contracts are a result of extenuating circumstances where a problem arises with how the contract was entered or the context in which the contract is developed. In either case, it makes for a headache for both parties and can lead to legal ramifications.
To fully understand how to prevent voidable or void contracts, we dive into the definitions of each, how they occur and what to do about them.
A voidable contract is one that was created legally and was initially enforceable. It becomes voidable when there is a defect or legal reason to potentially terminate the contract.
The reasons a contract may become voidable extend to:
- Failure by either or both parties to disclose a material fact: A ‘duty to disclose’ all relevant and important information as it pertains to the execution of a contract is expected between both parties. For example, if a driver fails to inform an insurance company of driving bans from other countries, they are withholding information that would inform the insurer’s decisions. Where an insurer finds this information out later, the contract can be considered voidable under fraud or misrepresentation of the facts.
- Mistakes, misrepresentations, or fraudulent behavior: If the information provided by either party and underpinning the contract is false, the contract may be voidable. From the contractual perspective, it is irrelevant if the inaccurate information was provided intentionally or erroneously.
- Unconscionable terms: For a contract to be valid, there must be an exchange of something of value from both sides. The value does not have to be equal but cannot be exceptionally skewed in favor of one party. Unconscionability in a contract unfairly treats one party to the point where they are not afforded any realistic bargaining power.
- Undue influence and duress: It is not possible to fairly negotiate when one party can exact unreasonable influence over the decisions of the other party. Consent cannot be given under physical, opportunity, economic, or any other threat. If a person in power uses their advantage in the dynamic to coerce a decision, the contract can become voidable.
- Incapacity to contract: A thorough contract analysis process should reveal the capacity to contract an individual before anything is signed. However, where one party is found to be intoxicated, under the age of 18, or with a mental disability, the contract may be rendered voidable. In the case of a minor, the contract may be ratified once they hit adulthood but is voidable until that date.
- Breach of contract: A contract may be voidable if the agreed terms are violated. Failure to deliver on the terms, pay, or conduct oneself following the terms of the contract and more are all breaches of the contract.
What happens when a voidable contract is discovered?
As mentioned, a voidable contract is one that was initially legal and enforceable. Once a reason has been discovered to render the contract voidable, it does not mean it is automatically voided.
The party aggrieved by the failure or breach has the option to accept the defect and maintain the validity of the contract. Going forward, both parties can agree to remove or rectify the defect to ratify the contract.
If the aggrieved party does not want to continue, they may reject the contract as they were unable to offer true consent to the real terms. Where the voidability is disputed, the onus is on the aggrieved party to provide evidence of the defect and present it to the relevant authority.
What makes a contract voidable and void contracts are not the same. Voidable contracts come with the option of rejecting or accepting a contract based on defective terms. That luxury does not exist with a void contract.
A void contract is unenforceable from the very beginning. It cannot be ratified or amended to become enforceable in the future. Essentially, it is treated as if it never existed. A contract can be declared void if there the following can be proven:
- Illegality: Contracts involving illegal products, services, or actions are void from the outset. As the terms exist outside the law, the contract terms are not enforceable by law. For example, an employment contract for a blackjack dealer in a state where gambling is prohibited is void as it is not a legal service.
- Unlawfully restraining: A contract constructed to restrain someone’s legal rights is a typically void contract. Such contracts will often be deemed unconscionable from the outset and declared void.
- Incapacitated parties: If either or both parties are incapacitated by way of mental disability or intoxication, the contract will be considered void as the party cannot provide fair and true consent.
- Contravening public policy: A contract that directly violates public policy cannot be enforced. For example, an employment contract that forbids employees to take leave or bathroom breaks is void as it runs contrary to public policy. Similarly, contracts that obstruct justice, disadvantage public services or prevent any human rights are void under US contract law.
How can a contract be declared void?
In an ideal world, both parties will agree to void a contract incorrectly created. However, things rarely go this smoothly so it is best to prepare thoroughly for voiding a contract.
Review the contract and note which elements, terms, and conditions fail the validity test. Specify the exact reason the contract should be voided such as illegalities or contraventions of public policies and collect the necessary evidence to support your position.
Once the evidence is collected, inform your lawyer of your intentions and ask them to standby. Present your findings to the other party along with the course of action preferred. Voiding the contract doesn’t have to end the relationship entirely as a new contract can be drawn up in place.
Creating contracts can be a minefield. While some contracts obviously don’t pass the smell test and violate rights and legal responsibilities, others are more subtle and down to coercion or an unfair power dynamic. Where there are significant concerns about the validity of a contract, it is advisable to speak with legal representation. Never sign until you are assured of the validity.